The CFPB, OCC, FDIC, Federal Reserve, and NCUA have issued a joint statement “to specifically encourage” banks, savings associations, and credit unions “to offer responsible small-dollar loans to both consumers and small businesses” in response to the COVID-19 outbreak. The statement builds on the March 19 statement issued jointly by the OCC, FDIC, and Federal Reserve on Community Reinvestment Act (CRA) consideration for activities in response to the outbreak. In that statement, the agencies noted that the activities they will favorably consider for CRA purposes could include offering short-term, unsecured credit products for creditworthy low- and moderate-income individuals, small businesses, and small farms.
In the latest statement, the five agencies state that financial institutions can make responsible small-dollar loans under the current regulatory framework through a variety of loan structures “that may include, for example, open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans.” They also encourage financial institutions, for borrowers who experience unexpected circumstances and cannot repay a loan as structured, “to consider workout strategies designed to help enable the borrower to repay the principal of the loan while mitigating the need to re-borrow.” Financial institutions are cautioned to make loans consistent with safe and sound practices and fair treatment of borrowers and in compliance with applicable statutes and regulations, including consumer protection laws.
While recognizing that consumers can benefit from small-dollar loans “in more normalized times” and indicating that they are working on “future guidance and lending principles for responsible small-dollar loans,” the agencies provide no new guidance for financial institutions to currently use in making small-dollar loans. In May 2018, the OCC issued a bulletin intended to encourage its supervised institutions to offer small-dollar loans. That bulletin, however, raised several concerns, namely its failure to confirm that the National Bank Act authorizes national banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state and its unfavorable view of bank-nonbank partnerships.
The FDIC published an RFI in November 2018 seeking input on “steps the FDIC could take to encourage FDIC-supervised institutions to offer responsible, prudently underwritten small-dollar credit products that are economically viable and address the credit needs of bank customers.” However, the FDIC has not yet issued new guidance, and unlike the OCC which has withdrawn its restrictive guidance on deposit advance products, the FDIC has not withdrawn its substantially identical guidance that effectively precludes FDIC-supervised institutions from offering deposit advance products. Deposit advance products would appear to be precisely the type of product best suited to meet the demands of consumers struggling with the economic fallout of the COVID-19 pandemic.
Given the questions raised by current guidance and the current absence of clear lending principles, financial institutions seeking to engage in small-dollar lending in response to the agencies’ encouragement would be well-advised to consult with counsel and seek guidance from their federal supervisory authorities about how the regulatory admonition to provide more credit will be implemented. For example, what rates will the agencies view as “responsible”? Will the agencies relax stringent capital requirements currently in place for sub-prime high-rate loans? Members of our Consumer Financial Services Group have substantial experience in assisting clients in structuring and implementing small-dollar lending programs and in interacting with the federal banking agencies.